Many feel that the issues surrounding the proposed bailout of Wall Street are too complex for ordinary citizens to understand. I believe that the issue is simple: the political leadership in Washington is asking us to borrow money to give to Wall Street firms in order to prevent an economic crisis.
The response of this citizen is equally simple: No Sale.
Over the last 10 years mortgage loans have been given to more people under more generous terms than were previously available. Wall Street viewed this debt collectively as an asset, packaged and leveraged it, and invested in the global markets. Many borrowers are now having trouble repaying their debt and the defaults are rippling through the financial system.
The stock market has dropped precipitously this month, credit is tightening, and home foreclosure rates have spiked over the last two years. Some say that an economic depression is around the corner if we do not act decisively and immediately.
Henry Paulson, CEO of Wall Street giant Goldman Sachs until appointed Treasury Secretary by George W. Bush in 2006, has proposed legislation to Congress which would authorize him to purchase bad assets (i.e. those where the underlying debt is not likely to be repaid) from financial firms. In essence, the money that homeowners cannot pay back will be given to the banks from the public treasury, in order to cover their losses and restore confidence in the market.
Many criticize the Paulson - Bush proposal, pointing to issues like the lack of oversight of the Treasurer himself, who would have sole authority to determine what should be bought at what price. Counter proposals address this, and also demand equity in the companies we bail out, limit excessive executive compensation, call for more stringent regulation of financial firms, and provide relief for some homeowners and victims of fraud.
These proposals, while mitigating the worse aspects of the Paulson – Bush plan, are still ultimately directed at the wrong sector of the economy. If the underlying problem is a bubble created by mortgage defaults, we should first move to lower the mortgage default rates. This would solidify the value of the assets traded by Wall Street and improve the overall financial picture.
In many cases this will provide public money to individuals who imprudently entered into financial transactions and reward their bad decisions, but this is equally true if you give the money directly to financial companies, but simply on a much larger scale.
The Treasury Department will need to create an operation to support these payments and the government will be involved as an arbiter in commercial disputes and this will all certainly cost money. Individuals would apply for re-financing help and be evaluated on a case-by-case basis, like any other federal program. While this is far from ideal, we can at least finance the initiative as applications come in instead of instantly adding $700 billion to our national debt.
Providing relief directly to mortgage holders absolutely bears a cost, but it is preferable to focusing on Wall Street in that it:
- Approaches the credit crisis from the bottom up by restoring confidence in the underlying bad assets, moderately improving their valuation and allowing the new capital to trickle up through the financial sector.
- Provides direct relief to individuals in financial crisis, many of whom are victims of bad circumstances and not bad decisions. Keeping people in their homes also directly benefits communities, keeping public assistance costs down and minimizing the public safety issues that come with abandoned homes.
- Acknowledges the reality that many loans are bad and as a result the markets will suffer, but softens the blow for individuals in the most pain. This will let us realistically examine our economic picture instead of just pumping more debt into a housing market that has tripled in value over the last twenty years.
The idea that we simply hand over $700 billion of taxpayer to Paulson and Bush, who consistently resisted calls to intervene in the housing market and have repeatedly told us the economy is strong, is simply absurd. While many counterproposals improve on this plan, they still at their core simply borrow money on behalf of the American taxpayer and transfer it to Wall Street firms.
The leaders of both of our political parties are asking us, the citizens, to sign on to the deal. My response is simple: No Sale.
Please join me in taking action to oppose these reckless proposals.
Cross-posted at OhNoElBlot!